In 1909, as one of the scores of short pictures he turned out that year, D.W. Griffith directed “A Corner in Wheat,” a 14-minute film adaptation of a story by the populist antitrust novelist Frank Norris. In it, a Wall Street speculator buys up so much of America’s wheat and keeps it off the market that prices soar and millions — including the farm family Griffith shows laboring in the fields — go hungry.
Americans’ long-standing apprehensions about banks getting control of the stuff of life are, as we’ve learned again in recent weeks, generally justified. The latest episode of Wall Street’s manipulation of commodity prices was revealed Sunday in a remarkable New York Times article by David Kocieniewski that showed how Goldman Sachs, just by warehousing 1.5 million tons of aluminum, has managed to raise the price of every beer and cola can the world over. Goldman doesn’t own the aluminum, yet in the best tradition of middlemen who add no value to the product but manage to nonetheless take a hefty cut, it owns a vast expanse of warehouses outside Detroit, where much of the nation’s aluminum is stored. And stored. And stored.
Before Goldman bought the warehouses three years ago, the Times reported, aluminum ingots generally were kept in the warehouses for six weeks before being shipped to factories to be turned into goods. Now they linger on average for 16 months, during which Goldman collects a daily storage fee from the banks, hedge funds and traders who own the ingots — a fee that is factored into the metal’s spot-market price and that raises the price for all aluminum sold on that market, no matter where it’s stored. (Goldman thoughtfully pays those traders a premium so they won’t suffer too much from the lengthy rentals.) Regulations imposed by the London Metals Exchange — which until last year was owned by banks, including Goldman and Barclays, that are its members — say that an ingot can remain in a particular warehouse for only a certain period, so Goldman employs truckers to move the ingots from one warehouse to the next in its vast storage yard.
This is capitalism straight out of Frank Norris — or Franz Kafka.
Aluminum isn’t the only commodity that banks are cornering. JPMorgan Chase is facing a reported $500 million fine by the Federal Energy Regulatory Commission (FERC) for allegedly manipulating California and Michigan energy markets. Earlier this month, the commission fined Barclays $435 million for similar transgressions in California. In the former case, the FERC claims that JPMorgan’s energy traders misrepresented the price of electricity contracts, which led to the states’ electricity buyers — and, ultimately, consumers — overpaying power plants that the company owned. It’s Enron revisited, albeit on a more modest scale.
Bank control of the commodity markets is both an old and new phenomenon. It was commonplace when Griffith made “A Corner in Wheat.” Four years later, in 1913, future Supreme Court Justice Louis Brandeis noted with alarm that “investment bankers” had become “the directing power in railroads, public service and industrial companies.” In 1956, however, after the New Deal reined in big banks’ power and abuses, Congress passed and President Dwight D. Eisenhower signed the Bank Holding Company Act, which limited banks’ investments to other related financial entities.
In the 1990s — a decade in which banks grew to dominate the U.S. economy — the Bank Holding Company Act was effectively undone. Congress passed the Gramm-Leach-Bliley Act, which amended the 1956 law to permit banks to establish financial holding companies and gave the Federal Reserve authority to designate the kind of firms that these companies could invest in or purchase outright. In those halcyon Greenspan days — and even in some subsequent Bernanke days — the Fed approved Wall Street’s investments in commodities and a whole lot else. Indeed, in a Senate Banking Committee hearing Tuesday, Ohio Democrat Sherrod Brown reported that “the six largest U.S. bank holding companies have 14,420 subsidiaries, only 19 of which are traditional banks.”
The threat this poses to Americans and the U.S. economy is twofold. First, banks hold the ability to jack up prices on life’s essentials. Second, since giant, publicly insured banks such as JPMorgan Chase are investing in all manner of businesses and markets, taxpayers would be on the hook if those businesses and markets should tank. That’s why we need to bring back something like the Glass-Steagall Act, which built a wall between depositor banks and investment banks, and the 1956 Bank Holding Company Act. Otherwise, Wall Street will continue to corner both matter and energy.